Challenges Confronting Multiemployer Pension, Health and Welfare Plans

1. Challenges Confronting Multiemployer Pension, Health and Welfare Plans Presented to: Quality Construction Alliance National Issues Conference May 9, 2011 By Randy DeFrehn Executive Director National Coordinating Committee for Multiemployer Plans

2. Overview • Current Funding Picture • Public Policy • Public Sector Pensions • Pension Relief Act • Transparency • Patient Protection and Affordable Care Act

3. Current Funding Picture

4. Market Rates of Return for 08 and 09 Median Returns 2009 Median Return 16.6% 2008 Median Return -22.1% Source: NCCMP Surveys of Funded Status of Multiemployer Plans

5. Market Returns Are Only Part of the Picture Median Reduction -12.2%

6. While Returns are Up, Hours are Down All Plans Down 13.2% Source: NCCMP Surveys of Funded Status of Multiemployer Plans

7. Changes in Average Funded Status 2008 - 10 Source: NCCMP Surveys of Funded Status of Multiemployer Plans

8. Distribution of Plan Zone Status 2008 - 2010 Source: NCCMP Surveys of Funded Status of Multiemployer Plans

9. Plans’ Response to Financial Crisis Source: NCCMP Surveys of Funded Status of Multiemployer Plans

10. Challenges Confronting Multiemployer Plans – Declining Union Density In 2010, 7.6 million public sector employees belonged to a union, compared with 7.1 million union workers in the private sector. The union membership rate for public sector workers (36.2 percent) was substantially higher than the rate for private sector workers (6.9 percent).

11. Public Policy

12. Recommendations of the Deficit Reduction Commission

13. The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Health Benefit Tax Exclusion • “…the Commission’s recommendations on tax reform regarding reducing and potentially eliminating the exclusion for employer-provided health insurance will help decrease growth in health care spending, according to virtually all health economists.”

14. The National Commission on Fiscal Responsibility and Tax ReformRecommendations

15. Congressional Research Service – Study of the Tax Exclusion for Employer Provided Health Insurance

16. Implications of Eliminating Tax Exclusion • PPACA includes an Individual Mandate • insurance companies may no longer exclude people with Pre-Existing Conditions • Mandate eliminates “Carrot” approach of tax exclusion • The Individual Mandate is under court Challenge • Worse case scenario: • Congress repeals Tax Exclusion • Mandate gets struck down by courts

17. The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Retirement Programs • 4.4: GIVE PENSION BENEFIT GUARANTEE BOARD AUTHORITY TO INCREASE PREMIUMS • Primarily directed to single employer program • Sought to restore solvency • achieve mandatory budget savings in the near term, and • sharply reduce the likelihood of a government rescue in the future.

18. Federal Budget Proposal FY 2012 • Proposes to give the PBGC Board the authority to adjust premiums and directs PBGC to take into account the risks that different sponsors pose to their retirees and to PBGC.

19. The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Social Security • 5.1: MAKE RETIREMENT BENEFIT FORMULA MORE PROGRESSIVE • “Modify the current three-bracket formula to a more progressive four-bracket formula, with changes phased in slowly”… by adding new bend point at median income.

20. The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Social Security • 5.4: GRADUALLY INCREASE EARLY AND FULL RETIREMENT AGES, BASED ON INCREASES IN LIFE EXPECTANCY .

21. The National Commission on Fiscal Responsibility and Tax ReformRecommendations

22. Public Sector Pensions

23. Public Sector Pensions • Believes DB plans should be replaced • Contends that Liabilities are vastly understated • Believes liabilities should be valued at “risk free” (Treasury) –rates (about 4.5%) Joshua rah Professor Kellogg School Northwestern

24. Public Sector Pensions • Introduced House Resolution: • (1) the Federal Government should not bailout State and local government employee pension plans and other post-employment benefit plans; and • (2) State and local governments should immediately institute reforms to their employee pensions plans, including replacing defined benefit plans with defined contribution plans. Jason Chaffetz Congressman Utah 3rd Dist.

25. Public Sector Pensions • Agrees with Financial Economists • DB plans should be terminated • Liabilities should reflect “Risk-Free” Rates • Introduced H.R. 567 “Public Employee Pension Transparency Act “ • Cosponsors: (among others) • Paul Ryan • Daryl Issa • Michelle Bachman Devin Nunes Congressman CA 21st Dist.

26. “…Public employee pension plans will also have to report their liabilities using a uniform accounting standard that provide realistic rates of return and tie assets to more reasonable fair market valuations.”

27. Public Sector Pensions • “This bill will provide a much-needed dose of financial transparency” Jordan Forbes National Taxpayers Union Jordan Forbes National Taxpayers Union

28. Public Sector Pensions • “provide a choice between the current Social Security system and Personal Retirement Accounts… -- it's your money and your choice.” Steve Forbes Publisher, Forbes Inc. Director National Taxpayers Union

29. Public Sector Pensions • “…would address the underlying deficiencies that have allowed states and municipalities to be fiscally reckless with their pension plans,” Grover Norquist President Americans for Tax Reform

30. Public Sector Pensions • “…legislation should allow states to file for bankruptcy, as a result of which trade unions would be forced to agree to cuts in benefits. If they refuse to agree, the bankruptcy judges could impose cuts.” Newt Gingrich Former Speaker U.S. House of Representatives

31. Public Sector Pension Opponents Joshua Rauh Devin Nunes Jordan Forbes Jason Chaffetz

32. Public Sector Pension Opponents Joshua Rauh Jason Chaffetz Devin Nunes Jordan Forbes Steve Forbes Grover Norquist Newt Gingrich

33. Public Employee Pensions • Time to Focus on Facts not Rhetoric • Pensions are Deferred Compensation employees receive for lower pay • Most systems require employee funding as well as employer • Many employees do not participate in Social Security • Employers did not make required contributions • Problem compounded by market collapse

34. Effect on Multiemployer Plans • When PPA Funding rules sunset in 2014 the Financial Economists will press for reporting by our plans at “Risk Free” rates. • Using Rates of 4.5% instead of actuarially assumed rates will Raise liabilities exponentially

35. 2014 – PPA Funding Rules • Funding rules sunset in 2014 • Need to lead reform process • Alternatives to traditional DB plans under review • Current Media Assault on Public Sector plans will adversely affect our plans

36. At Risk Plans • Plans which are projected to reach insolvency • Still require targeted relief • Will benefit plans, participants, sponsors and the PBGC • Focus on Short term Deficit Reduction makes relief less likely • General Opposition to DB plans will spill over to Multiemployer Plans

37. 2014 – Expiration of PPA Multiemployer Funding Rules • Concern by lawmakers that multiemployer plan liabilities are next “Bailout” after public employee plans • Pressures by financial economists to recast liabilities in terms of “risk-free” interest rates • Pressures by FASB / IAS requiring greater transparency for employer financial disclosures • Proposals by some within the Multiemployer community to allow reductions in pensions already in pay status

38. Governmental Attention

39. Preservation of Access to Medicare and Pension Relief Act

40. Primary Provisions • 30-Year Amortization of 2008 /09 Investment Losses • 10-Year Smoothing of 2008/09 Investment Losses • Temporary Expansion of Asset Smoothing Corridor to 130%

41. IRS Guidance • Solvency Test – • Plan must be projected to have sufficient assets to pay all expected benefit payments and other expenditures over 30 years • Must use same assumptions and plan of benefits in effect at time of certification

42. Conditions • Benefit Restrictions • Plans that elect any of the relief provisions are prohibited from adopting any benefit improvements within 2 years of a plan year to which the relief provisions apply • Each portion of loss recognized begins a new 2 year period • effective restriction period to obtain full relief - 12 years

43. “Fictional Transparency”Proposed Accounting Changes

44. DeFacto Regulation • Accounting Profession’s Transparency Proposals • IAS 19 – Accounting for Defined Benefit Plans • FAS 450 : Loss Contingencies • Subtopic 715-80: Proposed Exposure Draft on Multiemployer Withdrawal Liability

45. Accounting Rules • IAS 19 – • Eliminates Deferred Recognition of market gains and losses • “Mark to Market” Accounting • Requires Companies to disclose Multiemployer plan participation by: • If information is available, by treating their portion of the plan’s liabilities as a separate plan of the employer; or • If not, reporting contributions to plan • Fails to recognize long-term nature of pension obligations

46. Accounting Rules • IAS 19 – Joint Comments • Do not eliminate smoothing • Balance the desires of investors with public retirement policy in local jurisdiction • Recognize long-term nature of pension obligations

47. Accounting Rules ADOPTED “NO COMMENTS WERE PERSUASIVE” • IAS 19 – Comments • Do not eliminate smoothing • Balance the desires of investors with public retirement policy in local jurisdiction • Recognize long-term nature of pension obligations

48. FASB • Organization that sets Rules for the Accounting Industry • Define What constitutes “Generally Accepted Accounting Principles” (GAAP) • Rules apply to Publicly Traded Companies and Private Companies • Indirectly accountable to Government through SEC oversight

49. FASB • U.S. Counterpart to International Accounting Standards Board (IAS) • Objective is to move to “Harmonize” the Global Accounting rules • Publicly Supported by: • SEC • Treasury Secretary Geithner

50. FASB • The People who brought you: • SOP 92-06 • Required Disclosure of Fictional Retiree Health Liabilities • Corporate Equivalent Resulted in Termination of Retiree Health Benefits for 2/3 of Workforce that Previously enjoyed them • Additional Cost item to Multiemployer Funds of Little (if any) Value